Zero financing rounds and not a single name in our Crunchbase entry to date, and we'll come in with a bang one day.
VCs were simply too slow to follow our pace so far (by now we grew out of their typical round size & target multiple) and we'll probably grow profitable without them.
Sociomantic did the very same thing by the way and nobody was any wiser when they did a huge exit from nowhere. Thanks to the environment, it's still pretty easy to bootstrap in Berlin and go after alternative financing sources (it's starting to change though, starting at the rents).
There's still the usual Rocket copycats and some interesting SV-style overhyped BS startups too by now that won't survive - but by and large Berlin has a lot of humble, technically excellent and hard working startups to offer. It's definitely going to survive the down-market to come.
Although we have a rather nonstandard business area (not the usual ecommerce/saas/social/gaming stuff) and have no direct competitors, we could get a good grip at it by going down several routes: talking to industry experts, comparing indirect competitors' valuations and also by extrapolating from usual relevant business metrics such as current and projected revenue, traffic, margins, growth rates, and market size.
We also talked to quite some VCs who confirmed our range to be pretty spot on in initial negotiations.
Still, the first big unexpected hurdle was that VCs were totally "blinded" by their previous expertise. They tried to apply numbers from their well-known business areas (social / saas / ecommerce) to our model, which simply didn't fit our business case. So we went out and built the product and sold it to large clients anyway.
Thing is: Our product by now outperforms the next best option for our clients by 100% with no alternatives or competitors in sight (it's a little niche-y, but still a multiple billion dollar market).
With a product like that, the second thing that we didn't expect was that we tripped the "too good to be true" sensor everywhere, raising doubts.
And when we were over it, VCs seemed to have an ego problem with being "too late", us not wanting to do a particularly large round, them not reaching their target multiple to save the fund, us being "too expensive already" or them always wanting to "advise" a team of industry veterans and second-time entrepreneurs that demonstrably knew better than them - instead of simply putting in their money and help with PR and their networks instead.
Thing is: All investors say they want a great team, stellar culture, demonstrated product-market fit, fast execution, great technology and hockeystick growth.
We brought it all to them and found out that if you know you have it and are asking a fair price for it, 99% of them are too scared to jump on board of a train that's already full steam ahead. They'd rather be the one discovering it.
What I took from it is that awesome VCs are just as hard to find as awesome start-ups.
Interesting. Have you tried to reach out to non-German VCs as well?
>We're at a 8 digit dollar valuation here
What do you mean by this, given your next sentence that there are 0 financing rounds - then how do you have a valuation? I'd like to know what you meant by 'we're at an 8 digit dollar valuation'.
>Zero financing rounds and not a single name in our Crunchbase entry to date
>VCs were simply too slow to follow our pace so far (by now we grew out of their typical round size & target multiple) and we'll probably grow profitable without them.
>Still, the first big unexpected hurdle was that VCs were totally "blinded" by their previous expertise.
all of this is completely standard. you wouldn't have experienced it if you had been in silicon valley.
your story kind of proves that VC funding is not an option in Europe.
>Our product by now outperforms the next best option for our clients by 100% with no alternatives or competitors in sight
this is a typical case in which a European company can't raise money at a normal valuation.
Another typical case is if its product outperforms the next best option by 500%. Yet another case is if it has no competition and 100% monthly growth. None of these things would let a European company close a normal round, nor would cash flow do the same.
>With a product like that, the second thing that we didn't expect was that we tripped the "too good to be true" sensor everywhere, raising doubts.
I do expect that. No European company will get an investment at a reasonable valuation for this.
>We brought it all to them and found out that if you know you have it and are asking a fair price for it, 99% of them are too scared to jump on board of a train that's already full steam ahead. They'd rather be the one discovering it.
Slight correction: 100%, not 99%. If it were 99% you'd just need to talk to a hundred investors, which you could do in about 2 weeks (10 workdays * 10 investor relationsihps per day = 100 investors.) So it's not 99%, it's 100%.
>What I took from it is that awesome VCs are just as hard to find as awesome start-ups.
Awesome VC's don't exist in Europe. Awesome startups do.
I've never heard of an even acceptable European VC.
The next time one of them wastes your time, ask them this:
"I'm afraid I don't talk with European VC's until they've proven that they're qualified buyers, since it is a waste of my time. So, I'd like to ask you a hypothetical qualifying question. Suppose you were wanting to invest in a company that had the following statistics: firstly, it received $600K in European Union funds as a grant to develop a technology, this was free money and did not need to be repaid. Second, suppose they were successful in developing their technology using this money and applied for and were granted strong international patents on their fundamental innovation, including a U.S. and EU patent. Third, suppose they've sold 1,000 products in the first 9 months, generating $1 million in sales from their first run, which they did not book a profit from. Due to strong international patents, suppose that at this stage they have a protected market and are targeting 70% margin (30% of the sales price is their cost of goods + other fixed amortized costs). Having sat down and done the calculation, you give them a discounted future earnings of $10M, based on your most conservative (lowest) targets of the number of orders that they ship, and based on nothing more than multiplying the number they have already shipped with slow single-digit growth for 5 years and then a drop to 0 because you do not model farther ahead than that. The basis for the growth is the products they've shipped in the past 9 months, and their lack of competition, their protection, and so on. For a company that had all of these assumptions, what might be a fair valuation (or range) for a $400K investment?"
Watch them not answer that question, at which point you terminate the conversation and stop wasting your time.
I came up with this example because it's the closest thing I could think of to validated, free money.
I would never talk to a European investor. If they gave me an acceptable answer to the above, I would ask for a reference. If the reference were to a successful European startup they've funded, I would send them a pitch deck and ask for a non-refundable earnest money deposit if they want to talk to me about it (something small, like a few k $.)
if they wanted to talk and did so, I would answer all their questions and tell them what terms I would accept and ask for a term sheet if they are interested.
if they offered terms I would sign it and get their money. if they didn't i'd stop giving them my time.
There is zero chance any European VC will get to the stage where they are giving you money under reasonable terms, though. what happens is you just cut them out.
Next time, just spend 3 days opening an office in silicon valley. you can fly out and have your money in a few weeks, rather than waste months on unqualified European VC"s.
would you talk to a mcdonald's cashier about selling your ferrari to him? Maybe for a minute.
Part of this affects the banking culture; it doesn't matter so much whether you lose or gain money as whether you did so following the conventional wisdom. If you lose money doing something unconventional, it's social and career death. If you lose it in something conventional like real estate speculation, that's fine, and you can keep drinking with the Right People who've also lost money in real estate.
(This is, of course, all opinion)
If I'm a VC and someone sends me, "hey, I pitched you xyz two years ago, you didn't invest. but I remember you know materials science and had worked as a trader. I'm introducing my friend, he's a chemist at MIT and he has just come up with a way to make a material that sells for $87,000/kg in any quantity for $1/kg + his proprietary sauce. he also doesn't want to destroy the market for it. I know it's a stretch but if you still have that materials science interest I think you would find after DD that he really does have the goods. I'm attaching his pitch deck which doesn't contain a lot of information. I've known him since grade school, when he was 9 he did the blades for the first wireless quad copter that streamed HD video, I don't remember the details but the alloys had a bunch of constraints and he ended up using a special plastic normally used in medical applications. Anyway he then concentrated heavily into materials science, would need some measure of coaching but is very coachable, and we talked about his project at an alumni dinner a few days ago. he casually dropped that he's doing 100k in trading sales without revealing to his buyers that he's making the stuff in his kitchen rather than trading it. I don't believe he ran a business and is a sole founder. let me know if you would like an introduction."
so what do you do?
you get that introduction, you read the pitch deck, and if it's too good to be true you fucking do due dilligence.
what does a european vc do, "oh no, this seems like free money to me. That's not what we're really about here."
filter it out.
What is an alternative financing source?
8 digit valuation according to...whom?
You are right to doubt the valuation - in fact, you would be right to question any valuation, since all parties involved benefit from inflated valuations (to a point).
It's not overpaying if they know exactly what they are doing and why: they can afford to pay for an inflated valuation. Also, value is subjective. If you go down Sandy Hill doing valuations, you're bound to get wildly different values - which one would you consider "correct" or "overpaying"?
Possible benefits, in no particular order:
* Increases chances of startup accepting their investment.
* Halo-effect on their investment. If $STARTUP is worth $X billion, then surely "they are onto something big". This in turn increases the chance of the startup succeeding
* Prestige/profit. If you were publicly buying a painting for ap speculation/resale, surely you can afford to pay 10% extra if it increases the painting's percieved value by 30%. Now you own a painting that's worth 30% more than it's "real" value (had you not paid more)
* fear of missing out on 'hot' startups.
VC's generally don't invest in snake oil or try to pawn off snake oil.
I wasn't suggesting conspiracy, my point is there is no "one true valuation" so answering the original question "valuation according to whom?" doesn't provide useful information.
>We're at a 8 digit dollar valuation here after just 2 years of hard work
and
>Zero financing rounds
Are a contradiction. Valuation isn't something you come up with your executive team or your accountant, it's the number that is deduced from an investmenet or an acquisition.
Also, valuation is by no way a measure a success, the real measure of success for a company is the amount of profit.
That would be a generally fair assessment of valuation, and shows how one can calculate valuation without direct investment by an outside party.
I had so much interviews at plain old small to middle sized companies in Germany which called themself start-ups just because it was cool. But most of them were just generic consulting shops.
I don't think many people will agree on this definition.
A new restaurant that is after ultra fast growth is not a startup. It's a small business. A new software company that attempts to innovate in a small niche is unlikely to achieve ultra fast growth but it is a startup.
To me, the difference between a startup and a small business is that a startup's goal is to innovate and its success depends on that innovation sticking. Quick growth is just one (possible) characteristic of this territory.
That's why most startups tend to be in the tech sector: most innovations use technology.
That's before you get into fads. Remember frozen yogurt? On a percentage basis that growth rate was incredible, and there were attempts to franchise, although that food fad went nowhere in the long run.
start-up -- n. a fledgling business enterprise
A new company with slow growth is a start-up. An old company with fast growth is not a start-up.
There's nothing about the growth rate that qualifies a company as a start-up. Though I suppose it could seem that due to a new company having "nowhere to go but up [or fail]".
If I open a hot dog stand, I may have incorporated only a month ago, but I haven't founded a startup.
--
This reminds me of one of my favorite HN posts ever. It's about dictionaries, good and bad.
No. For that, you'll have to provide a narrative of how you will revolutionize the global fast food market and secure the fate of humanity by providing billions of people real-time access to the very best of bovine and porcine by-product nutrition (optional: include heart-warming story about Denise, a mother of 7 from Decatur, IL, who was enabled to escape a hell of drug abuse and prostitution by opening a franchise, highlighting the world changing nature f your business and elegantly glossing over the fact that the franchise owner effectively earns less than a toddler searching landfills for sources of lithium).
Allowed to fester, the spin-terrorists will rape a language to its death.
Hackernews is not the world.
That must be why this is a reoccurring discussion on HN...
What does that mean: "people who run companies that don't even think about building a product"?
What do these companies you refer to do?
A "product" is when someone identifies that a repeatable solution exists for many customers. This is not as common as one-off solutions for a particular customer.
I haven't come across any of those describing themselves as a "start-up", but I probably just don't get out enough...
A startup is usually understood to be a company which is formed to test a new market or disrupt an existing one. The fast growth thing is not necessarily true since new markets are often not there. But to describe just any new company as a startup is very misleading both in terms of describing risk, but especially to potential employees.
This isn't to knock the value of entrepreneurship: there is quite a bit of virtue in starting a company that wants to tap an existing market. All things considered, these companies will likely do much better over the long run than most startup companies which end up failing.